Brexit vote, UK political confusion keep world markets on edge

Britain’s vote to leave the European Union continued to reverberate through financial markets, with the pound falling to its lowest level in 31 years, despite government attempts to relieve some of the confusion about the political and economic outlook.

UK finance minister George Osborne said early Monday that the British economy was strong enough to cope with the market volatility caused by last week’s “Brexit” referendum which has resulted in the biggest blow since World War Two to the European goal of forging greater unity.

“Our economy is about as strong as it could be to confront the challenge our country now faces,” Osborne told reporters.

“It is inevitable after Thursday’s vote that Britain’s economy is going to have to adjust to the new situation we find ourselves in,” said Osborne, who later ruled himself out of the running to succeed David Cameron as prime minister.

Boris Johnson, a leading proponent of Brexit and the frontrunner to be the next prime minister, praised Osborne for saying “some reassuring things to the markets”.

The former London mayor said it was now clear that “people’s pensions are safe, the pound is stable, markets are stable. I think that is all very good news.”

But neither Osborne’s nor Johnson’s words failed to stop the slide in stocks on world markets which began last Friday when Britons confounded investors’ expectations by voting to end 43 years of EU membership.

European bank shares had their worst two-day fall on record and world stocks as measured by MSCI index saw their worst two-day fall since the collapse of U.S. investment bank Lehman Brothers during the 2008 financial crisis. On Friday alone about $2.8 trillion was wiped off the value of world stocks, the biggest daily loss ever.

Sterling fell to a low around $1.3120, its lowest level since mid-1985. The euro also remained weak, after falling to a three-month low around $1.0910 on Friday.

Asian stocks markets opened weaker on Tuesday, with MSCI’s Asia ex-Japan index extending losses for a third day, down 0.5 percent. Japan’s Nikkei was off 0.7 percent.

“Markets already appear to be pricing in a full-blown recession in the U.K. and rising recession risk in the rest of Europe,” said David Donabedian, chief investment officer of Atlantic Trust Private Wealth Management.

Ratings agency Standard & Poor’s stripped Britain of its last remaining top-notch credit rating on Monday, warning that more downgrades could follow.

“In our opinion, this (referendum) outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the UK,” S&P said in a statement.

The yield on British 10-year government bonds fell below 1.0 percent for the first time as investors bet the Brexit vote would trigger a Bank of England interest rate cut aimed at steadying the economy.

U.S. stocks ended lower for a second day also, following European markets, pulled down by banking stocks amid uncertainty over London’s future as the region’s financial capital. Safe-haven bond and gold prices rose.